CHIP SHORTAGES TO BOOST CARMAKERS' PRICING POWER IN EUROPE - Euler Hermes
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ALLIANZ RESEARCH
CHIP SHORTAGES TO BOOST
CARMAKERS’ PRICING POWER IN
EUROPE
27 July 2021
An unprecedented and intensifying shortage of materials, notably
semiconductors, is creating a supply-demand mismatch in Europe's
automotive sector that could last until H1 2022. This creates a unique
MAXIME LEMERLE
Head of Sector and Insolvency Research window of opportunity for carmakers to raise prices by +3-6% after
maxime.lemerle@eulerhermes.com nearly 20 years of constraints. Over the first half of this year, demand for
new vehicles in Europe benefited from the grand reopening: new car
ALEXIS GARATTI
Head of Economic Research registrations grew by +25.2% to almost 5.4mn passenger cars (+1.354mn
alexis.garatti@eulerhermes.com units) compared to the first half of 2020 (see Figure 1), with significant
double-digit gains in most countries, notably the top four markets (+14.9%
FLORENTIN LAVAUD
in Germany, +28.9% in France, +51.4% in Italy and +34.4% in Spain). This
Research Assistant
improvement is not yet sufficient to recover pre-crisis volumes since the first
half of 2019 recorded 6.916mn passenger cars (i.e. +1.553mn units).
Nevertheless, it has already and noticeably contributed to improving
business sentiment in the sector, as evidenced by Eurostat business
surveys1 on factors limiting production (see Figure 2). According to the
latter, in Q2 2021, the factor “demand” posted a large drop from the high
levels reached in Q2 and Q3 2020 to reach H1 2019 levels, i.e below the
long-term average.
Figure 1 - Production and sales of new vehicles, EU-27
Sources: ACEA, Eurostat, Euler Hermes, Allianz Research
However, this same survey also indicates a severe rebound of
material/equipment as a key factor limiting production. The latter reached
an all-time high in Q2, well above the previous records seen in 2018 and
2020, which were explained, respectively, by the regulatory changes in
1
https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/business-and-consumer-surveys/download-business-and-
consumer-survey-data/subsector-data_en
1
CO2 emissions and supply-chain disruptions due to the lockdowns. This
historic level of material/equipment shortages is highly related to the lack
of semiconductors2, which has been exacerbated by the wide adoption
among carmakers of just-in time processes of production dedicated to
minimize the stockpiling of all types of inputs. Indeed, over the first half of
the year, all carmakers continued to emphasize their obligation to
optimize assembly lines and even to cut back production.
In both April and May, at the EU-27 level, the volume index of production
for the overall automotive sector3 fell back to its lowest monthly levels
since the early 2010s (see Figure 1) — by -3.4% m/m and -7.8% m/m,
respectively — with most car-manufacturing countries contributing to the
drop, including the major ones. In this context, the level of production
reached in May was still well below the pre-crisis level for the EU (-23%
compared to 2019 average), with a stronger hit for established car
producers (-33% for France, -30% for Germany, -25% for Spain and -10% for
Italy) than for the other car-producing countries such as Czechia (-6%),
Sweden (-6%) and Hungary (-5%).
Figure 2 - Factors limiting production in the automotive sector, EU-27
level, quarterly survey
Sources: ACEA, Eurostat, Euler Hermes, Allianz Research
Looking at past episodes of material/equipment shortages, the intensity4
of the constraint reached in Q2 2021 appears to exceed the standard
deviation observed in the past within Europe by 2.5 times. This shortage
intensity looks particularly severe for Germany and Spain (i.e. 51% of EU
production) and to a lesser extent in smaller car-producing countries such
as Finland, the Netherlands and Slovakia (see Figure 3). Differences in
shortage intensity reflect differences in anticipation in demand (which led
to differences in orders cut), uneven relationchips with suppliers (short-
term vs long-term contracts, closer partnership allowing better access to
inputs) and differences in types of needs in car chips (chip shortages are
2 See our recent report Semiconductors realpolitik: A reality check for Europe.
3 Motor vehicles, trailers and semi-trailers, parts and accessories.
4
In order to estimate the shortage intensity we compare the last level of shortages (Q2 2021) with the level of standard deviation observed over the past 20
years.
2
higher for power management and microcontrollers than for Advanced
Driver-Assistance Systems products).
We calculate5 that the current shortages could take on average 3.5
quarters to normalize, with Germany and Sweden exposed to a longer
wait (3.9 quarters for each, see Figure 3). In a best case of a recovery
starting as early as Q3 2021 — which is the timing most often quoted by
carmakers as of today — we estimate that the recovery process will be
complete in Q2 2022. Interestingly, the recovery time is higher in Western
Europe: Germany, Sweden, Spain and Italy, which together represent 72%
of EU production, will take longer than 3.5 quarters to recover, while
Hungary will need nearly three quarters and Czechia, Poland, Romania
and Lithuania less than three quarters.
Figures 3a & 3b– Shortages by country, EU-27 countries, Q2 2021
(*) in number of standard deviation observed in the past twenty years
(**) in number of quarters
Sources: Eurostat, Euler Hermes, Allianz Research
The long-lasting shortages will maintain a supply-demand mismatch
within Europe until H1 2022 since the fundamentals of domestic demand
remain better oriented for the short and medium term. This is due to
several reasons: Some are directly related to the grand reopening, such as
the boost in consumer confidence and the (partial) unleashing of the
significant amounts of savings accumulated by households6. Others are
specific factors supporting the purchase and/or renewal of vehicles, from
the willingness of households to be less dependant/exposed on collective
transportation to the subsidies in place to favor the switch to electric
vehicles cars, the intensifying restrictions on the use of traditional cars
powered by international combustion engines as well as, later in 2022, the
need for car rental companies to upgrade their fleets.
5
In order to estimate the recovery time, we calculate the needed time to cover a cycle in the past 20 years. To do so, we compute the difference between the
highest and the lowest level of shortages in the same business cycle and then we normalized it. This simple calculation gives us an insight of how much time it
took the automotive sector to get back on track.
6
See our report European households: The double dividend of excess savings
3At the same time, we do not expect exports to mitigate the supply-demand
mismatch, since the US market is seeing a stronger dynamic (with vehicle
sales already close to H1 2019 levels in H1 2021 (8.5mn units)), which
should impact the carmakers that export the most to the US, particularly
German brands. Domestic and export orders have already bounced back
to top levels in June, according to business surveys, pointing to a solid
outlook in demand for the months ahead (see Figure 4) — providing that
the sanitary situation remains under control.
Figure 4 – Business sentiment on shortages (material/equipment), price
expectations, orders, inventories and utilisation of production capacity,
EU-27
Sources: Eurostat, Euler Hermes, Allianz Research
In this context, we expect car prices to increase by at least +4% in
Germany, with the potential to exceed +10%. Spain and Italy could see
increases between +2.4% and +5.8%, while France could see a rise
between +0.8% and +5.0%. Unlike in the past, the automotive sector now
faces a unique supply situation with all the stars aligned: a very high level
of orders, a very high utilization of production capacity, which is reflecting
the severe adjustments done by the sector over the pandemic, and a very
low level of inventories, all at a time when companies have to face a surge
in raw material prices (rubber, copper, steel) and higher freight rates 7. This
unique background is supporting a higher pass-through to the consumer,
also because it is ‘helping’ car manufacturers to keep on adjusting their
product mix in favor of the most profitable cars to the benefit of the
premium segment — and thus German brands. Financial statements
available for Q1 and Q2 2021 most often confirm good if not strong
margins, despite the lower volumes. This context is also implying an upside
trend in second-hand car prices in Europe but not with the same
magnitude observed in the US since the US market has proved to be much
more massively supply-constrained (with the inventories/sales ratio down
to an all-time low in May 2021).
7
See our report Global trade: Ship me if you can!
4Figure 5 – New and second-hand car prices evolution, EU-27 and US
Sources: Manheinm, BEA, Eurostat, Euler Hermes, Allianz Research
To obtain the estimated price increase, we calculate the elasticity of car-
CPI regarding car-PPI8 during recovery times in order to catch the historical
recovery pace. Then we outline a set of scenarios (see Figure 6) based on
both (i) three levels of price expectations and (ii) three levels of pass-
through capacities in order to have a range of potential price increases
with the following two extreme cases:
- A “low” scenario in which carmakers’ price expectations are lower (+5
bp) and their pricing power is low (25%);
- The “high” scenario in which carmakers’ price expectations are still
high (+15 bp) and their pricing power is high (75%).
Thereafter, we simulate the impact of the expected price shock by adding
it to the last three-months average. Finally, we distribute the simulated
shock on CPI over the recovery time.
Figure 6 – Potential car price increases, EU-27 level
Increase in automotive
Price Ability to transfer price
price (CPI) compared
expectation expectation to PPI
to last quarter average
+5 25% 2,7%
50% 3,6%
75% 3,4%
+10 25% 3,1%
50% 3,8%
75% 4,5%
+15 25% 3,4%
50% 4,5%
75% 5,6%
Sources: Eurostat, Euler Hermes, Allianz Research
The potential vehicle price increase may slightly differ between countries
(see Figure 7). In Germany, which represents almost half of the automotive
sector (44% of the production and 38% of car registrations), we expect car
prices to increase by at least +4% but with the potential to exceed +10%,
noting that they have already started to increase in 2021 (+2.6% y/y in May
and +3.2% y/y as of June). Spain and Italy, which both represent 7% of
8 Car-CPI : car consumer price index ; car-PPI : car producer price index
5automotive sector output, are expected to increase their car prices
between +2.4% and +5.8%. France, whose prices have historically been
more stable, is expected to see its car price increasing between +0.8% and
+5.0%.
These numbers must be put into perspective with the maximum car-CPI
observed in the past: +2.8% for Spain, +2.9% for France, +3.3% for Germany
and +3.5% for Italy. We anticipate in our “low” scenario that only the
German car-CPI would be higher than its historical level. In our “high”
scenario, we estimate that the four countries - which account for 2/3 of the
EU car production – would post a historic pace of car-CPI.
Figure 7 – Potential car price increases, selected countries
Sources: Eurostat, Euler Hermes, Allianz Research
6These assessments are, as always, subject to the disclaimer provided below.
FORWARD-LOOKING STATEMENTS
The statements contained herein may include prospects, statements of future expectations and other forward -looking
statements that are based on management's current views and assumptions and involve known and unknown risks
and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such
forward-looking statements.
Such deviations may arise due to, without limitation, (i) changes of the general economic conditions and competitive
situation, particularly in the Allianz Group's core business and core markets, (ii) performance of financial markets
(particularly market volatility, liquidity and credit events), (iii) frequency and severity of insured loss events, including
from natural catastrophes, and the development of loss expenses, (iv) mortality and morbidity levels and trends, (v)
persistency levels, (vi) particularly in the banking business, the extent of credit defaults, (vii) interest rate levels, (vi ii)
currency exchange rates including the EUR/USD exchange rate, (ix) changes in laws and regulations, including tax
regulations, (x) the impact of acquisitions, including related integration issues, and reorganization measures, and (xi)
general competitive factors, in each case on a local, regional, natio nal and/or global basis. Many of these factors may
be more likely to occur, or more pronounced, as a result of terrorist act ivities and their consequences.
NO DUTY TO UPDATE
The company assumes no obligation to update any information or forward -looking statement contained herein, save
for any information required to be disclosed by law.
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